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Bonds hang on to gains
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April 29, 1999: 3:40 p.m. ET
Stunningly optimistic wage inflation report lifts long bond nearly a full point
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NEW YORK (CNNfn) - Bond prices held the high ground in late Thursday trading, clinging to the morning's enthusiasm after an employment report indicated that wage inflation remains dormant if not dead.
Shortly before 3 p.m. ET, the benchmark 30-year Treasury bond had edged slightly off its morning highs but was still up 30/32 of a point in price at 96-1/32, yielding 5.52 percent.
Traders said bond bulls were celebrating a weaker-than-expected employment cost index (ECI), which showed the cost of doing business, measured by wages and other employee benefits, inched up only 0.4 percent in the first quarter.
The low figure indicated that wage inflation not only remained minimal but actually slowed its already glacial pace in the quarter. This proved a welcome surprise for the bond market, confounding gloomier expectations of a 0.8 percent rise from fourth-quarter 1998's 0.7 percent increase.
Economists watch the ECI with special care because the index is known to be a favorite of Federal Reserve Chairman Alan Greenspan, who uses wage inflation as a primary bellwether of broader inflationary pressures in the U.S. economy.
The statistic suggested that the U.S. economy still has ample room to grow without generating appreciable inflationary pressures or running the risk of higher interest rates, both deeply positive signs for the bond market.
Jobless little concern
Indeed, the reaction to the ECI was so enthusiastic that bond traders virtually ignored less supportive data found in the morning's other economic reports.
According to the Labor Department, which also released the ECI data, initial jobless claims fell to 294,000 in the week ended April 24 from 314,000 in the previous week, disappointing more bullish estimates of 308,000.
A large number of claims for unemployment benefits generally indicates prevalent layoffs and other signs of a weak or shrinking labor market. The converse -- fewer claims and a tight job market -- is detrimental to bond prices because full employment forces businesses to raise wages to compete for qualified workers.
Rising inflation depresses demand for bonds and other fixed-income securities by lowering the real return they offer on investment.
The bond market also managed to shake off a report showing renewed vigor in the construction industry, although the news managed to knock the long bond off its highs.
Ahead, traders look toward Friday's release of advance first-quarter gross domestic product data to give a green light to a more sustained bond market rally.
In particular, bond players will watch the implicit price deflator for confirmation of Thursday's good anti-inflationary news. The deflator, a crucial indicator of overall inflation at work in the economy, came in at 0.8 percent for fourth-quarter 1998.
Dollar under wraps
The dollar got little lift from the data, instead deepening the morning trading rut it fell into early in the day.
Shortly before 3 p.m. ET, the greenback was narrowly back over the 119-yen level at 119.04 yen, only slightly under its previous close of 119.12.
Trading was subdued in the absence of Japanese traders, on vacation through Tuesday for the Golden Week holiday.
The yen got a brief boost from comments by Economic Planning Agency head Taichi Sakaiya, who reiterated the official position that Japan's economy is improving, but the upturn proved transitory without more concrete support.
Likewise, the euro's position weakened after traders grew tired of European officials' policy of verbal support for their beleaguered currency.
A recent flood of comments from various continental monetary authorities, including European Central Bank chief Wim Duisenberg, have lifted the euro off its lifetime lows. However, even the staunchest euro bulls have since begun to wonder whether the European Union would back its words with action.
The euro was back in decline in late U.S. trading, falling to $1.0591 from its previous close of $1.0628. 
-- by staff writer Robert Scott Martin
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